Payday Loans: Consumer Group Admits 36% Cap Will Kill Business

[May 26, 2009.]

 

Anti-payday loans campaigners have finally admitted that a 36 percent interest rate cap will eliminate payday lending.

Changing Their Tune on Payday Loans

For a long time, consumer groups and campaigning legislators have maintained that a 36 percent cap on payday lending APRs (annual percentage rates) would not rob consumers of choice by effectively closing down the industry, but would merely protect vulnerable people from so-called 'predatory lending practices'.

For example, only a month ago, the Dallas Morning News quoted a Texas state legislator talking about payday loans. State Rep. Carol Kent, D-Dallas was reported as saying: "I don't think they can look anybody in the face and say, 'We can't make a profit at 36 percent.'"

But last week the leading consumer lobby group in this field, the Center for Responsible Lending, admitted that a 36 percent rate cap will kill the industry. It posted a six-minute video on one of its payday loans websites in which the narrator says: "Arizona will be the 16th state to eliminate payday lending by enforcing an interest rate cap of around 36 percent."

Payday Loans and Common Sense

The admission will come as no surprise to anyone who knows much about business. The overheads and costs of setting up a payday loan are similar to those for processing any other lending agreement. Just like a bank, auto loan company or credit union, a payday lender has to pay salaries, rent, utilities, taxes and so on. But unlike other financial institutions, that payday lender can't recoup those costs over years; typically, it must do so over 14 days.

This is exactly the same business model that faces car rental companies. If someone goes on vacation, and rents the same model of car at the airport that they have at home, the cost per day will be much higher for the short-term rental agreement than for the long-term auto loan or lease.

After Payday Loans, Will Hotels Be Next?

Consumer groups could brand this practice 'predatory', and cap car rental charges so that they were similar to the equivalent day rates for three-year auto loans. And very soon Hertz, Avis and all the others would be driven (no pun intended) out of business. Would that protect consumers or rob them of a valuable choice?

And how soon after closing down car rentals would those campaigners move on to tool hire companies and hotels, both of which have to charge much more for short-term transactions than long-term ones?

Payday Loans and Hard Luck Stories

There is no doubt that in the wrong hands payday loans--just like all forms of credit--can lead to cases of genuine misery and hardship. And certainly everyone who takes one out should do so with his or her eyes wide open.

As part of its campaign to kill the industry, the Center for Responsible Lending has launched a new payday loans web site, where it plans to post 400 of the worst hard luck stories.

Hard Cases Make Bad Law

The site has only been up for a short time, so it would be unfair to draw any conclusions from the fact that it has--at the time of writing--so far attracted only three stories--one of which tells of a single payday loan, which was repaid after only a minor hiccup, and so does not involve the famous 'spiral of debt' that is supposedly waiting to entrap every borrower.

However, it would be good if everyone thinking of taking out a payday loan were to visit the site. Because it is important to realize how dangerous payday loans can be if one is not absolutely certain that one can repay the loan--comfortably and in full--when it falls due.

Whether all the stories that may eventually be posted will turn out to make a compelling case for eliminating the payday loans industry is a different matter. As the old saying goes: hard cases make bad law.

 

About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.